Interim
Joint Committee on State Government

Minutes
of the<MeetNo1>3rd Meeting

of the 2004 Interim

<MeetMDY1>September 22, 2004

The <MeetNo2>third meeting of the Interim Joint
Committee on State Government was held on<Day>Wednesday,<MeetMDY2>September
22, 2004, at<MeetTime>1:00 PM, in<Room>Room 149 of the Capitol Annex. Senator
Alice Kerr, Acting Co-Chair, called the meeting to order, and the secretary
called the roll. (Representative Geveden, Co-Chair, had to leave the meeting
prior to roll call, due to illness.)

The minutes of the August 25 meeting were approved, without
objection, upon motion by Senator Buford.

First on the agenda was review of Executive Order 2004-728,
relating to reorganization of the Governor's Office, Personnel Department, and
the Department for Local Government. John Roach, General Counsel, represented
the Governor's Office. Cordell Lawrence, Deputy Commissioner, and Rich
Ornstein, staff attorney, represented the Governor's Office for Local
Development (GOLD) (formerly called the Department for Local Government).
Charts depicting the prior and current organization of GOLD were handed out to
the Committee. Mr. Roach gave a brief explanation of the reorganization. He
noted that a subsequent reorganization (EO 2004-903) restores the Department of
Personnel to cabinet status.

Representative Marcotte asked where regional representatives
of the Governor's Office fit in the GOLD reorganization. Mr. Ornstein said that
the Local Initiatives for a New Kentucky Office has seven regional offices,
which answer to their Executive Director and ultimately to GOLD Commissioner
Darrell Brock.

Senator Harris asked how many vacant positions will be left
unfilled under the Governor's overall reorganization of state government. Mr.
Roach said he does not know offhand but that the number would differ for each
cabinet. He said there is no doubt that, over time, the efficiencies and cost
savings of the reorganizations will be beneficial for the Commonwealth. He
added that all of the reorganizations had to be redrafted because they failed
to be ratified in the last legislative session.

Representative Adams questioned why the area development
districts and the Delta Regional Authority are not shown on the organization
charts. Mr. Ornstein said that they have worked hard to strengthen ties with
the area development districts and that ADD's are being treated at the commissioner's
office level. Mr. Lawrence said that the Delta Regional Authority, the
Appalachian Regional Authority, and the ADD branch were consolidated under the
Division of Grants. Representative Adams said he is mainly concerned that the
area development districts are not identified. Mr. Lawrence said that the long
history of the ADD's is much appreciated and respected and that GOLD could
produce a more detailed chart to show their place in the organization.

Representative Gray asked whether there are any cost savings
under EO 2004-728. Mr. Lawrence said the cost of salaries and benefits has
increased due to the addition of 15 positions for LINK (Local Initiatives for a
New Kentucky), a new initiative which moves government out to the people in
various regions of the state. Other than those 15 positions, the number of GOLD
staff is down to 54, compared to 60 in August, 2003. Mr. Roach said that
throughout state government the reorganizations have allowed the cabinet
secretaries the flexibility to save taxpayer money. Representative Gray said it
appears to him that employees are just being shifted from one place to another
and that there is really no reduction in numbers.

Senator Kerr said that, without objection, the Committee's
review of Executive Order 2004-728 would be reported in a memorandum to the
LRC. Next on the agenda was review of Executive Order 2004-723, relating to
reorganization of the Finance & Administration Cabinet.

Present from the Cabinet were Secretary Robbie Rudolph;
Deputy Secretary John Farris; and Mark Treesh, Commissioner of the Department
of Revenue. They provided the Committee with a handout entitled
"Efficiencies Accomplished by the Reorganization of the Finance and
Administration Cabinet (FAC)." [NOTE: The Finance & Administration Cabinet
reorganization also abolishes the Revenue Cabinet and establishes the
Department of Revenue within FAC; and it establishes the Commonwealth Office of
Technology (COT) within FAC, while abolishing its predecessor, the Governor's
Office of Technology.]

Secretary Rudolph gave an overview of the reorganization. In
summary, he said that all employees displaced as a result of the reorganization
will be reclassified or transferred to other positions without a decrease in
compensation. He went on to say that there are no scheduled layoffs associated
with the reorganization and no overall additions of personnel required to
implement the plan. There will likely be a reduction in current personnel
expenditures due to attrition over the next several years and the filling of
vacancies from within the agency. Revenue-generating positions will command the
focus for filling vacancies and, to the extent possible, will be staffed from
existing employee resources. Personnel within the entire Cabinet are reduced
from 2,056 as of 6/30/03 to 1,857 as of 8/30/04. COT has reduced the number of
contractors in that office; there are currently 153 at over $100,000 each, and
plans are to reduce those by half. The Department of Revenue thus far this year
has collected approximately $100 million in past-due income taxes,
approximately $31 million more than was collected during the same period in
2003. By December, postal services are to be combined into a single location on
Wilkinson Boulevard. Closure of the Madisonville surplus property location will
save about $250,000 annually. (Secretary Rudolph provided copies of his
presentation to the Committee, at the request of Senator Kerr.)

Representative Clark asked whether there will be checks and
balances or an internal audit system, since the Cabinet will now be charged
with both collecting monies through the Department of Revenue and also
dispersing them. Mr. Treesh said there is a separate unit of internal audit
within FAC, and they work in conjunction with the State Auditor. He said that
the Department of Revenue will continue internal control procedures that were
already in place.

Senator Kerr said that, without objection, the Committee's
review of Executive Order 2004-723 would be reported in a memorandum to the
LRC. Next on the agenda was review of Executive Order 2004-903, relating to
reorganization of the Department of Personnel.

Mr. Roach explained that the reorganization elevates the
Department of Personnel to cabinet level. There were no questions. Senator Kerr
said that, without objection, the Committee's review of Executive Order
2004-903 would be reported in a memorandum to the LRC.

Next on the agenda was discussion of the Public Employee
Health Insurance Program for 2005. Guest speakers were Secretary Bob Ramsey and
Commissioner Carl Felix from the Personnel Cabinet; Barbara Alvey, Mercer Human
Resource Consulting; and Mark Birdwhistell, Undersecretary of Health in the
Cabinet for Health & Family Services. After opening remarks by Secretary
Ramsey, Mr. Felix and Ms. Alvey gave an overview of the health insurance
program for 2005, with accompanying PowerPoint presentation. (Copies of the
PowerPoint were distributed to the Committee.) The following subjects were
highlighted in the presentation: historical perspective of the Public Employee
Health Insurance Program from 1999-2004; enrollment migration; covered expenses
paid to providers (average monthly allowed charges for policyholders) for
calendar year 2003; historical claim and premium increases for 2001-2003; total
premium costs for CY 2004 projected to CY 2005; comparison of 2004 PPO-Option A
plan with 2005 PPO-Preferred plan; and a summary of 2005 program changes. A
summary of key points of the presentation follows.

Since 1999 enrollment in the public employee health
insurance program has shifted from an overwhelming majority enrolled in HMO and
POS options to be predominantly PPO-based in 2004. Based on claims experience,
carriers' premium increases for HMO and POS options have historically grown at
a much faster pace than PPO premiums, and this has caused people to move
voluntarily into PPO options. Additionally, carriers have shown over time less
willingness to offer HMO and POS options in certain areas of the Commonwealth
because of concern about member costs. The shift toward PPOs is occurring in
the overall health insurance market. In 2003, average claims costs for
individuals enrolled in the HMO and POS Option-A plans were significantly
higher than for PPO Option-A. Although carriers increased their premium rates
over time to reflect the HMO and POS claims experience, those options were not
sustainable from a price standpoint—that is, regardless of how much carriers
increased the premiums, claims in those options would continue to increase at a
higher rate than premiums. The Commonwealth's experience for the first quarter
of 2004 indicates that carriers paid out more money to health care providers
than they collected in premiums.

Quasi governmental agencies and local governments have the
ability to enter the state group plan as long as they actively participate in
the retirement systems. Over time, the "quasi" group has grown from
10 or 11 four years ago to over 150 currently. The number of employees electing
health insurance coverage over the past four years has continued to rise. At
the same time, when the state's contribution toward flexible spending accounts
(FSAs) was capped at $234 for employees who waived coverage, that particular
population stayed static over time, and there was no increase in that cost to
the Commonwealth. The true increase of health care costs are sometimes offset
by that particular phenomenon of the state group.

If the program were to continue in its current structure in
2005, there would have been substantial increases in premium rates. For
example, the total monthly premium for single coverage under PPO Option-A is
$293 for 2004; in 2005, this would increase to $410. The Commonwealth's
contribution for school districts and state agency enrollees—not accounting for
FSA contributions for employees who waive coverage—would have gone from $363
million in CY 2004 to $508 million in CY 2005, or a 40 percent calendar year
increase. (See page 8 of PowerPoint.) Furthermore, consistent with the
program's historical experience, there was good reason to believe that the
number of carriers willing to bid for 2005 under the current arrangement would
have decreased. [Ms. Alvey noted that on page 9 of the PowerPoint, the column
entitled "2004 if Status Quo" should say instead "2005 if Status
Quo."]

Secretary Ramsey discussed program changes for 2005. He said
that employee contribution rates will be the same statewide. He went on to say
that there will be a discount incentive for nonsmokers. Premiums will be based
on 10 salary bands, with the average salary falling within pay band #5. In an
effort to move the Commonwealth's flexible spending contribution closer to the
national norm, the contribution has been reduced from $234/month to $100/month
for employees who waive coverage. Additional emphasis has been placed on
disease management programs for eight specific health issues. As part of the
wellness initiative, carriers will conduct health risk assessments for all
employees at no cost. The Administration has given serious consideration to
self-insurance. In 2005, regions #1 and #2 will be self-insured. If results are
positive, the goal is to become fully self-insured in 2006. While the overall
cost of health care continues to rise, the employees of the Commonwealth have
felt no cost increase in the past five years. It is the goal of the
Administration to move the public employee health insurance program from an
illness model to a wellness model. This move has been addressed by the
enhancement of disease management and wellness initiatives, the nonsmoker incentive,
contribution equalization, by having singles contribute toward their coverage,
and by providing extra funding toward couple, parent-plus, and family plans. In
closing, Secretary Ramsey said that under the 2005 plan model, the program
should begin to stabilize for the good of the employees and the Commonwealth of
Kentucky.

At this point, Senator Kerr asked staff to distribute a
handout from the Kentucky Retired Teachers Association—a September 21, 2004,
letter to members of the State Government Committee from Bobby Humes and Ray
Roundtree, the Association's Legislative Committee Co-Chairs. Discussion of the
public employee health insurance program then resumed.

When asked by Representative Larry Clark, Secretary Ramsey
said that the health insurance contracts for 2005 have been executed.
Representative Clark said that it appears then that the only possible changes
that could be made in a special session would be to enhance the plans by adding
additional money or additional benefits. [A day earlier, Governor Fletcher
announced plans to call a special session, to convene October 5, 2004.] Mr.
Birdwhistell said that the contracts have been entered into and that open
enrollment will proceed as scheduled on September 27. Representative Clark
expressed concern about the legislature potentially being subject to litigation
as a result of action it might take in the special session. Secretary Ramsey
said that the legislature could certainly enhance the program by trying to add
benefits or put more money into the program.

Mr. Birdwhistell said they feel that the program for 2005 is
solid. He said that if there are changes to the plan, he does not disagree that
there will be a host of legal and contractual issues that would have to be
addressed. He said the plan was put forward in February 2004 before the budget
committee and that he is somewhat surprised that there is so much reaction to
the plan at this juncture. He added that the plan was included in the budget
and was voted for in the budget. Representative Clark corrected Mr.
Birdwhistell. He said that the plan was not put in the budget. He said there
was a one-item revenue amount for the school districts—about $300 million—but
that each agency had to pick up that cost internally. There may have been a one-item
appropriation, but there was no plan document submitted in the budget. He asked
why there is going to be a special session if the plan is solid. Mr.
Birdwhistell said that, as he recalls, Secretary Ramsey and Brad Cowgill
presented the 2005 plan options before the budget committee in February and
that the details were available at that particular point. Representative Clark
said he served on that committee and that the details were not presented in
full.

Representative Clark asked how much money will be saved by
reducing the flexible spending account contribution from $234 to $100.
Secretary Ramsey said it is not a savings but rather a cost avoidance, which
will be put back into the plan. Representative Clark asked how much money was
shifted. Secretary Ramsey said they were able to shift approximately $48
million.

Representative Adams asked whether there is any effort to
identify the number of Kentuckians who do not have any health insurance. Mr.
Birdwhistell said he would try to answer from an insurance perspective. He said
they are focused on the approximately 570,000 people who do not have insurance
and that one of the things they are trying to do in Kentucky is create a
healthy insurance market. He went on to say that small employers are finding it
increasingly difficult to offer health insurance. The way to deal with
insurance is to move the market to one of more deregulation. They are also
trying to attract additional carriers to the market. The Governor will be
hosting an insurance forum with CEO's to ascertain what it would take to bring
carriers back to the market. Representative Adams noted that the Kentucky
Long-Term Policy Research Center, in conjunction with the University of
Kentucky, is starting a process to collect information on noninsured
Kentuckians of any type. He said that this is another element that should be
fitted into the picture. He emphasized that the legislature is interested in
all Kentuckians but that, at this point, it is not known how many do not have
insurance.

Representative Graham asked whether it was decided prior to
issuing the RFP that the state would be divided into regions with only one
carrier, and when was that decision made. Mr. Birdwhistell said carriers were
asked to bid on six scenarios in the RFP. All scenarios envisioned having one
successful carrier per region. He went on to say that in prior years, there had
been up to three carriers per county. It was determined to be in the
Commonwealth's best interest to have one carrier per region in order to ensure the
best price possible for both the Commonwealth and for families. Insuring all
employees within a geographic region enables carriers to give the best price
possible. This approach gave considerable negotiation leverage with carriers
and also gave the carriers predictability in establishing their prices. It was
very difficult for a carrier to know how to bid, as one of three per county.
Carriers had to bid conservatively because of so many unknowns. Regional rating
eliminated a lot of the unknowns, which translated into more favorable pricing.
Mr. Birdwhistell said that all of this was delineated in the RFP at the time of
the release.

Representative Graham said that competition generates better
service and that he does not think regional rating will provide better service.
Mr. Birdwhistell said that regional rating was extensively evaluated in the RFP
and that there was extensive competition in the form of prices. He went on to
say that when all carriers were bidding under a "winner take all"
scenario in a region, there was definitely price competition.

Representative Graham read from KRS 18A.225, "Health
insurance coverage provided to state employees under this section shall, at a
minimum, contain the same benefits as provided under Kentucky Kare Standard as
of January 1, 1994...." He said that, based on the package that has been
offered and what he has heard from his constituents, he does not think the
Commonwealth will be providing the minimum coverage as it was in 1994 under
Kentucky Kare. Secretary Ramsey said that, with the exception of the
elimination of cross-referencing, he believes the 2005 package probably meets
the standards but that he would have to go back and review Kentucky Kare to
make sure. He added that cross-referencing is not a dead issue and that they
are working to see what they can do in order to cross-reference.

Representative Feeley asked whether the new health insurance
contract is for one or two years. Secretary Ramsey said that, historically, it
has been a one-year contract and that they are looking forward to issuing an
RFP for calendar year 2006. Representative Feeley asked whether a rollover
provision was considered for flexible spending accounts in 2005. Secretary
Ramsey said they did not look at that option. Representative Feeley urged
Secretary Ramsey to look at this in the future, with an eye toward minimizing
costs and offsetting the lowering of the FSA benefit.

Representative Feeley asked why the total premium for couple
coverage in 2004 was more than twice that for single coverage. Ms. Alvey said
that is not necessarily indicative of the Commonwealth's experience but is
typical in any health insurance market. She said a risk selection factor that
enters into the calculation, since the carrier has less information about the spouse's
health history.

Senator Denton asked whether it would be possible to issue a
new RFP and complete the bid process by January 1 if the legislature
wished to add or change benefits during the special session. She asked also
whether it would be possible to extend the current contracts until the end of
March. Secretary Ramsey said they would not be able to execute new RFPs between
now and January 1. Mr. Birdwhistell said that it would be extremely difficult
to extend the current contracts. He said that January is probably the worst
month, from an actuarial standpoint, and that if they extended the contracts
for January and February, that cost would not have been included in the
actuarial premiums under which the current carriers are operating. Also, because
there are signed contracts for 2005, it would open up a host of legal and
contractual issues. In addition, it would be very difficult to operationalize
the flexible spending accounts. He said it is a very difficult situation to
even consider a contract extension, let alone the legal and operational cost.
He added that the focus is on making sure that employees have coverage
January 1.

Senator Denton asked how quickly and how seriously the
Commonwealth is looking at a potential buyout program for KCHIP children. Mr.
Birdwhistell said he is personally intrigued by that option. He said he
believes that is an opportunity that needs to be explored and that they have
begun exploratory efforts. He estimated that it would probably take six to nine
months to establish a buyout program and said it would also have to be
implemented to coincide with an open enrollment period.

Senator Denton asked about the elimination of
cross-referencing. Mr. Felix said that when development work started for 2005,
the initial idea was to look at one consolidated contribution across the board
instead of using salary bands. However, that contribution would have been
untenable, and this led to the development of salary bands. He said that
because of the complexity of correlating coverage between two active employees
in different salary bands, and in order to guarantee coverage by January 1, the
decision was made to forgo cross-referencing for 2005 and to look at another
way to figure out the cross referencing issue. He said that cross-referencing
involves a limited portion of the plan population, and in order to better serve
all employees, it was decided that salary bands was the way to go.

Representative Harmon, referencing page #8 of the PowerPoint
presentation, asked whether there is an estimate of what employees are paying
for health insurance, over and above the $363 million Commonwealth contribution
for calendar year 2004. Ms. Alvey said they did not have that figure but would
get it. Representative Harmon asked whether any thought was given to the
possibility that lowering the FSA contribution from $234 to $100 might result
in fewer employees waiving coverage, which would actually increase cost to the
Commonwealth. Secretary Ramsey said this was considered but that they expect the
migration to be minimal. Representative Harmon asked whether there has been any
consideration to date to converting FSAs into health reimbursement accounts
(HRAs). Secretary Ramsey said there has not. Mr. Birdwhistell said that there
is definitely something on the drawing board for health savings accounts for
the future. He said they are looking at all such options as they seek possible
improvements for 2006. He said that an improvement for 2005 that is not getting
recognized is that, for the first time, the Commonwealth is making a deliberate
contribution for family coverage. Secretary Ramsey said the average savings per
family is about $70 per month.

Representative Harmon asked whether it would be possible for
the legislature to add an HSA option for 2005, or would that have to be
postponed until 2006. Mr. Birdwhistell said he does not want to rule that out
but that they would have to look at that option to see how it would be
implemented.

Representative Thompson asked what, roughly, are the
aggregated costs to the Commonwealth for the total insured population for plan
year 2004, and what would the aggregated costs be under the proposal for 2005.
Mr. Felix said they would have to get those numbers from GOPM. Representative
Thompson asked that this information be made available to the Committee.

Representative Thompson asked what savings were realized by
self-insuring in regions #1 and #2. Secretary Ramsey said they believe they
have already realized savings or cost avoidance of approximately $10 million
through tough negotiations with the carriers. Mr. Birdwhistell said that
self-funding in those particular areas will also provide the opportunity to
really get into the wellness model, case management, and disease management,
and to get a hold on the medical costs before attempting self-funding on a
statewide basis.

Representative Marzian asked how the prescription drug
mail-order benefit will be impacted in 2005. Mr. Felix said the mail-order
benefit will be a component of the plan but will be impacted by the switch from
flat copays to coinsurance. Representative Marzian asked whether the Committee
could be provided with a letter that delineates what can or cannot be changed
in special session, since contracts with carriers have already been signed, and
considering the legal parameters. For instance, could the legislature add
benefits to the plan. Secretary Ramsey said they will provide that information.
At Representative Marzian's request, Mr. Felix then gave a brief overview of
the unresolved issue of unescorted retirees.

Representative Gray asked how the state plan will be
affected if a significant number of healthy state employees and teachers opt
out and choose private coverage instead. Mr. Birdwhistell said he does not
think there will be an adverse effect on the risk pools. He said he knows
several individuals who are exploring their options in the commercial sector
but contended that they will not find comparable individual coverage at a
comparable price in the commercial market. He said the ones he has talked to
have chosen to come back under the state plan.

Representative Gray posed the question whether reducing the
FSA state contribution from $234 to $100 constitutes discrimination against
certain state employees and teachers. Secretary Ramsey said what is important
is that the Commonwealth recognizes the need to provide quality health
insurance coverage also for dependents. Reducing the FSA contribution enabled
the Commonwealth to reduce the cost of health insurance for family members. Mr.
Birdwhistell said that is a trend consistent with other states. He went on to
say that other states are contributing toward family coverage to some degree.
Over time, there has been a decline in the number of employees selecting family
coverage, which is not a good situation, both from a health care and an
actuarial risk standpoint. Realizing the decline, the Commonwealth took
deliberate action to subsidize the family rate.

Senator Borders said that health insurance has been a major
problem at least since 1993. He pointed out that the Personnel Cabinet has
inherited the problem and expressed appreciation for their efforts to resolve
it. He added that he hopes that in the upcoming special session some positive
things can be done.

Representative Belcher said she may have misunderstood but
that it was her recollection that in testimony before the State Government
Committee regarding the RFP for 2005, one of the proposed scenarios was for
carriers to bid as many counties as they chose to bid—the same as one of the
scenarios for the 2004 plan year. Mr. Birdwhistell said he does not recall
that, adding that he did not testify to the State Government Committee.
Secretary Ramsey said he also does not recall that. Mr. Birdwhistell said he
believes the scenarios described were all "one per region" and that
there was never a "one per county" scenario.

Mr. Birdwhistell said that they feel the 2005 plan
approaches the commercial market and is consistent with other states. He went
on to say that the state has ignored any benefit changes for eight years. Every
other employer in the Commonwealth has had to wrestle with the health insurance
issue and has moved from a copay model to a coinsurance model in order to get
consumers more engaged in their health care costs. The Commonwealth, as an
employer, has not followed suit, but the 2005 plan makes a major step in that
direction. Representative Belcher asked whether there is data to confirm what
private employers are doing, since that is not what she has been hearing. Mr.
Birdwhistell said that they had been canvassing at the time the benefit designs
were initially drawn and, more recently, have been gathering additional
information. He said the plans that they have seen in the commercial sector are
moving away from fixed copays. Representative Belcher asked whether they would
be able to share that type of data—for small, medium, and large businesses. Mr.
Birdwhistell said they have benchmark data. He added that the special session
will be an opportunity to assemble information pertinent to issues such as
unescorted retirees, chronic medical conditions in the state employee
population, and other cost drivers behind the rate increases in health
insurance.

Representative Barrows asked the speakers whether they could
quantify savings or cost increases associated with the program changes listed
on page 10 of the presentation—quantify their value—if not now, at a future
time. Secretary Ramsey said he thinks they know the overall value. He said that
if they had continued down the same road, it would have cost about $145 million
more, but by moving to the new model they were able to keep the costs
reasonably contained. Mr. Birdwhistell said they would be happy to provide an
explanation and rationale for the program changes. He said it would be
difficult to quantify or show savings, because many of the changes are not in
themselves cost-containment initiatives. Some, in fact, are actually
improvements. He said they would be happy provide the information but that some
of the changes are not quantifiable. Rep. Barrows asked them to identify which
items are and which are not quantifiable and to provide information on savings
or costs for those items that are quantifiable.

Representative Barrows asked Ms. Alvey whether Mercer Human
Resource Consulting helped in preparing the RFP and reviewing carrier
responses, and participated in the negotiations. Ms. Alvey said Mercer has not
been involved in the negotiation discussions but has helped with other aspects
of developing the RFP. Secretary Ramsey said that health insurance employees
have done a lot of work on the program but that Mercer has not been involved
nearly as much in the past three or four months.

Representative Barrows asked Mr. Birdwhistell whether he
conveyed to the Governor, prior to announcement of the special session, the
potential legal issues associated with changing the 2005 plan. Mr. Birdwhistell
said he did. He said he believes the Governor is fully aware of the opportunity
in a special session to enhance the understanding of how difficult the
situation is. He added that there may be improvements that can be made within
the contracts that are in place for next year. Representative Barrows asked
whether the language of the contracts would allow for amending them. Mr.
Birdwhistell said it would depend; if amending the contract would change risk
assumptions, that would be more difficult to do. Representative Barrows
suggested that the most efficacious way to address some of the concerns about
the health plan would be for the Governor to simply authorize further
negotiations rather than going through a special session that may not get
results and which may create legal issues. Mr. Birdwhistell disagreed. He said
that to do that would put state employees and their families at risk of not having
health insurance coverage January 1.

Representative Pullin asked whether the possibility of a
special session was considered before the contracts were let. Secretary Ramsey
said he did not know. Discussion followed to clarify the relationship between
the 2005 program changes and the PowerPoint chart projecting CY 2004 to CY
2005. Representative Pullin said she just wants to make it clear that some of
the program changes were intended to save money and that the projections in the
chart do not reflect those potential savings. Ms. Alvey said that most of the
program changes which would generate savings are long term and would not have
immediate impact; further, some of the changes are not cost savings but address
other programmatic issues.

Representative Pullin asked how much Mercer Human Resource
Consulting has been paid this year. Secretary Ramsey said he does not have the
number but can get it.

Representative Marcotte said he recently read a report
suggesting that the premium for a comparable policy would be about $100 higher
in Kentucky than Ohio. He asked whether there is a differential between the two
states and, if so, is it related to the ill-conceived HB 250 [health care
reform legislation enacted in 1994]. Mr. Birdwhistell said there are regional
variations that could cause a differential to come into play. He went on to say
that there are areas of the state where provider reimbursement is higher and
that this would be factored into health insurance premiums. There are pockets
of the state with a high incidence of disease such as asthma and diabetes,
which also contribute to extra cost. Remnants of HB 250 are also adding
additional cost to premiums in Kentucky. In order to level the market with
other states, Kentucky needs to get rid of the regulatory barriers and attract
additional carriers to the market.

Senator Buford made the following requests from the
Personnel Cabinet in preparation for the special session: (1) the health
insurance contracts need to be sent to all four offices of both House and
Senate leadership; (2) The actual Mercer reports—showing how Mercer determined
its numbers—need to be sent to all House and Senate leadership offices,
including if and what Mercer determined regarding self-insurance; and (3) the
Cabinet should provide a breakdown of claims costs in the state group health
plan last year for mental health parity, autism, and hearing aid devices.
Regarding the latter request, Senator Buford noted that he is an advocate for
these coverages but would like to know what was expended separately for those
items so that the legislature can judge whether this is an area that should be
looked at. He added that legislative leadership may also want to see the RFP.
Secretary Ramsey agreed to the requests.

Senator Harris said that the unescorted retiree issue has
concerned him for some time and that he would like to know the extent of the
problem. He asked the speakers to provide data on what unescorted retirees are
costing now and a projection of that cost five years from now.

Representative Larry Clark asked whether salary bands are
used in the private sector. Ms. Alvey said it is not prevalent; however, West
Virginia and Kansas, she believes, use salary bands, as do some private sector
employers, particularly those who are concerned about maintaining health
insurance for lower-paid employees. There were no more questions, and Senator
Kerr thanked Secretary Ramsey, Mr. Birdwhistell, and Ms. Alvey.

The next person to speak was Bob Wilson, Director of Pupil
Personnel for Ballard County Schools. Mr. Wilson said that Representative
Geveden had asked him to tell the Committee how he and his family, who are
relatively healthy, would be adversely affected by the 2005 health insurance
plan. He compared medical costs and premiums under his current PPO-Option A
plan with the higher costs of the 2005 Commonwealth Preferred plan. He also
spoke about the negative impact of the 2005 plan on other school employees.
When asked by Representative Pullin, Mr. Wilson said that the starting salary
for teachers in his district is about $27,000. In closing, he asked for the
Committee's help and support. He said that Kentucky needs good health benefits
in order to attract the best and brightest teachers who can help children
achieve the highest proficiency. Senator Kerr thanked Mr. Wilson for his
testimony.

Next on the agenda, Senators Dan Kelly, Jack Westwood, and
Damon Thayer addressed the Committee regarding BR 176, prefiled September 16 by
Senators Westwood and Thayer. Senator Kelly said that the efforts of Senator
Westwood and Senator Thayer are probably most responsible for the upcoming
special session. He said he believes the Governor, after looking at the
proposals in BR 176, realized that there are things that can be done with
legislative authority to lessen the impact of the health insurance changes. He
also said it should be recognized that the Governor is operating under the
constraints of no budget and a judicial decision that he was not to spend any
more money than was authorized to be spent in the last budget.

Senator Westwood gave an overview of BR 176, which he said
was a cooperative effort that included the Governor and legislative leadership.
[As summarized on the LRC web site, the legislation would establish a health
reimbursement account (HRA) for state employees and school board employees
participating in the state health insurance plan and set the annual employer
contribution for 2006 at $600; require a reduction in the employee coinsurance
for retail prescription drugs; raise the cost-of-living increase for retired
teachers to 2.3% retroactive to July 1, 2004, and raise the cost-of-living
increase effective July 1, 2005, to 2.2%; increase salaries for full-time state
employees and local school board employees by $600 January 1, 2005; and make
appropriations from the General Fund to fund the salary increase and health
reimbursement accounts. The bill also contains an emergency clause.]

Senator Westwood explained that the $600 salary increase for
2005 would be in lieu of the one percent raise proposed earlier by the
Governor. He said it was felt that raising salaries by a defined amount would
benefit lower-income employees. He went on to explain that $400 of the salary
increase would go toward paying deductibles and the remainder to pay for
prescription drugs. The other $600, designated for individual health
reimbursement accounts, would cover deductibles and other health care costs. It
would be paid with pre-tax dollars in 12 monthly increments of $50 each and
could be rolled over into subsequent years. The Personnel Cabinet would
administer the accounts. Prescription drug copays would be reduced by half
after the 25th prescription; the anticipated cost for this benefit would be
about $2 million. The proposed cost-of-living increase for retired teachers
would be applied retroactively. Senator Westwood emphasized that they are still
working on the legislation and that it is not "the final word." He
said he hopes that the House and Senate will be able to put their partisan
differences aside and get the job done.

Senator Thayer said he was eager to work with Senator
Westwood on the bill because he has a high number of state employees in his
district. He said he has spent some time meeting with retired teachers and was
visited at his home by a large contingent of Scott County bus drivers the
previous evening. He went on to say that he and Senator Westwood are
particularly concerned about those on the lower end of the income bracket and
feel that BR 176 is a good first step. They look forward to working with
members of the House to get the process started and, hopefully, solve the
problem in a timely manner on behalf of all of their constituents.

Representative Harmon said he thinks BR 176 is a good start.
He asked whether an employee would be allowed to contribute to the proposed
HRAs and draw interest on the account. Senator Westwood said he does not know
but that he would be open to that idea. Senator Thayer said that Kentucky will
have to get approval from the federal government for the HRAs. He said LRC
staff estimates that the approval process would require about six months.

Representative Thompson asked whether the $600 salary
increase and the $600 HRAs would be continued on an annual basis. Senator
Westwood said the $600 would be added to base salaries. He said he would hope
the HRA benefit would be continued but that it would have to be approved by the
legislature.

Representative Larry Clark asked when the Committee will
receive a fiscal note on BR 176. Senator Kelly said there is not an official
LRC fiscal note but that an LRC fiscal analysis is already available.
Representative Clark asked that this be given to committee staff for
distribution to the members.

Senator Kerr thanked the Senators for addressing the
Committee and commended them for their good work. Representative Barrows also
commended them and said that parts of BR 176, such as the cost-of-living
increase for retired teachers and the notion that additional resources are
needed to help offset the expected increase in health insurance costs, were in
the House budget proposal. He said those are good ideas and that he wished they
could have "hammered through" those considerations at that time and
perhaps have avoided much of the consternation that has now beset all members
of the legislature.

Representative Feeley said that hopefully the legislature
can put its "political swords" aside and quickly address the problem
in special session. Representative Barrows said the parameters for what the
legislature will be able to change in special session appear to be limited,
based on what he has heard today. He said he thinks the wisest approach would
be for everyone to get together to try to work out a mutually agreeable
solution prior to the session.

Senator Kerr thanked everyone and said that hopefully
everyone can proceed and work hard to come up with a solution. Business
concluded, and the meeting was adjourned at 3:35 p.m.